Thursday, August 16, 2018

Is the Fed's Floor Falling Out?

David Beckworth has a piece up at Alt-M arguing that Trump's fiscal policy is causing problems for the "floor" system the Fed now uses to implement monetary policy.Under the floor system, the Fed sets the rate of interest it pays on bank reserves, and it can then keep the banking system flush with cash without overstimulating the economy, since banks will prefer to hold excess cash as reserves.It only works if the interest rate on reserves is above the rate banks can earn in the private market, otherwise they will drain their reserves to buy other assets.A loose fiscal policy, David argues, is raising market rates through Treasury borrowing, thereby making it hard to maintain the floor system.

I take a different view: the Fed's current predicament, I would argue, says only a little about current fiscal policy but a lot about past monetary policy.In particular, it says that, contrary to much conventional market wisdom at the time, monetary policy was too tight during the zero interest rate period.But I'll get to that.

First, let's ask: is the floor system really in danger? I would say, no, or rather, it is only in danger if the Fed doesn't really like it.In principle there is no particular problem with continuing the floor system if the Fed wishes to do so.

The floor system always depends on having an adequate supply of base money.If there's not enough base money, the market rate rises, and the intended floor is no longer binding.How much base money is enough?That's something the Fed has to make an educated guess about.If it's expecting a normal fiscal policy and instead gets a big tax cut paired with a lot of new spending, then it will find that its educated guess was wrong and the required amount of base money is more than it expected.That's what's happening now.

But the situation is easily remedied. If the Fed wishes to continue the floor system, it simply has to create more base money through open market operations.Or alternatively, it can raise the interest rate on reserves so that it is no longer in danger of being below the market interest rate.But the Fed doesn't seem inclined to do the latter: there is no particular sign that interest rate pressure from fiscal policy is causing it to adopt a faster schedule for raising rates.

And the Fed has good reason not to raise rates more quickly.We can debate about the particulars, but overall the Fed sees no strong sign that the economy is about to overheat, and even if it did, there's a case for allowing the inflation rate to rise temporarily to compensate for years of undershooting the target.But surely fiscal policy is stimulating the US economy.Presumably the Fed feels that this stimulus is appropriate for now, and in the absence of such fiscal stimulus, the Fed would be providing its own stimulus by slowing the increases in the interest rate it pays on reserves.

And in that case it would end up in the same predicament it is in now.Interest rates overall would be lower, but market interest rates would still be rising more quickly than the Fed's floor rate.

So what is special about the Fed's current predicament?Why do people suggest that the floor system is in trouble, rather than just saying the Fed needs to create more base money through open market operations, as one would normally do when the current floor is becoming problematic?

I think the answer is clear: the Fed created so much base money via open market operations during the zero interest rate period—via the Large Scale Asset Purchases (LSAP's), or Quantitative Easing (QE), as they were commonly known—that it figured it wouldn't have to create much more any time in the near future. It's kind of like when I spend $400 at the supermarket and then think, "I'll never have to go shopping again." It always turns out that I have to resume my market operations sooner than expected.

The upshot is this: the Fed thought it was doing a huge, huge thing with those LSAP's, but with the benefit of today's hindsight, it turns out they weren't so huge. (Despite my $400 grocery purchase, I'm already running out of sandwich bread, and I don't have time to go shopping today.)The Fed could have done a lot more.And maybe if it had done more, the recovery would have been faster.

Oil Maker Machine is less expensive and much easier to operate than bigger oil machines. Oil Maker Machine is not hard to operate and less costly. With our home manual oil maker, you may make any type of essential oil as you want with ease and fun.

Savaliya Oil Maker Machine for Home Usage. This Product is Easy to Use and it produces health oil for your family. There are also some other products of savaliya industry, like coconut oil maker machine, peanut oil maker machine, sesame oil maker machine.

Oil Maker Machine is less expensive and much easier to operate than bigger oil machines. Oil Maker Machine is not hard to operate and less costly. With our home manual oil maker, you may make any type of essential oil as you want with ease and fun.

Once you make a purchase through Thai Lottery, a representative at our local offices purchases your official lottery tickets in person on your behalf. After the physical ticket is purchased, the representative scans the ticket which you can see by logging into your account. Each scanned ticket is stamped with a serial number of Thai Lottery result 2019, along with the date, time, and place of purchase by the official lottery itself. You can verify the accuracy of this data with the official lottery operator at any time. After the ticket is scanned, it is carefully placed in a secure safe in our local office

Absolutely great posting. I actually happy when i done this topic. I am excited world have a excellent author. Always i am waiting for next reading. Thanks a lot for great posting share. Social Media Marketing Solution

Clipping path is a must for any kinds of product images. Clipping Path Service can provide you with your desired product with a high-end view which will help you to attract both the organic customers and paid to add customers. Do clipping path for your business growth and show your customers what you have!

It is really a nice and helpful piece of information. I’m glad that you shared this helpful info with us. Please keep us informed like this. Thank you for sharing. [url=https://www.thewayanadresorts.com/sharoy-resort-wayanad.html]sharoy resort wayanad[/url]

In India the biggest festival has arrived . Can anyone guess . Yes it is IPL .( INDIA KA TYOHAR). I just wait whole year to watch the matches .My favourite team is MUMBAI INDIANS . vote now. For your favourite team

Cloud communication is at its peak with millions of websites and software being developed every year. This has exponentially increased the use of automated A2P communication. There have been many channels businesses have used but nothing beats the simplicity and effectiveness of Text API.

Last month I had taken service of Agarwal Packers and Movers, I have to shift from Delhi to Mumbai and they told me the time of delivery. But After time passed, I still didn't get my households, Then I called to Agarwal Packers and Movers for enquiry of my households. They ask to the Truck Driver and told me that their truck was punctured so it got late. This is not their fault It can happen to anyone.

HP printer has several models with different features. It is based on advanced technology, yet there is a possibility that some technical glitches might occur while using it. In that case, you have the option of HP Printer Technical Support Number +1-870-345-4464 where you will be able to rectify the error by certified technicians.HP Printer Customer Care NumberHP Printer Customer service Number

Can I just say what a relief to find someone who actually knows what theyre talking about on the internet. You definitely know how to bring an issue to light and make it important. More people need to read this and understand this side of the story. I cant believe youre not more popular because you definitely have the gift.

You are so cool! I don't believe I've truly read through something like that before. So wonderful to discover someone with unique thoughts on this subject. Really.. thanks for starting this up. This site is one thing that is required on the internet, someone with some originality!https://compressedpcgames.info/

Swertres Result July 22 2019. Check Swertres Lotto Result 11AM, 4pm, 9PM draw @ PCSO on 22-07-2019. Playing swertres lottery and winning a jackpot prize must have been your dream if you’re a Filipino even with slightest of interest in the lottery games. The swertres lotto has impressed the lotto lovers in Philippines so much that every day thousands of entries are received and everyone is looking to match the swertres result to start making riches.swertres lotto Result

Kerala, the Gods own country, added another first to its cap in 1967, when a lottery department was setup for the first time in India. The right idea came from the ...We provide fast lottery result on time by 3.30 PM everyday. This is not an official Govt. app and we are not associated to any other lottery agency or seller.Kerala Lottery Result!

Simply we can do lots of things, by understanding basic concepts. I love to learn many things and also doing lots of research in a better way. It helps me in lots of ways. Recently I wrote an article based on men health in the topic of Kamagra for men. Kamagra needs to use for maintaining a relationship for several hours without getting tiredness. This article really helps men in the right way.

It’s a pity you don’t have a donate button! I’d most certainly donate to this excellent blog!I guess for now i’ll settle for book-marking and adding your RSS feedd to my Google account. I look forward to brand new updates and will talk abouut this website wiyh my Facebook group. Talk soon!

We help people get Loan $5000 online. Unsecured personal loans that can be approved today and you could have the money as soon as tomorrow. Safe and convenient with monthly installment payments. Get a 5000 dollar loan now!

Thanks for ones marvelous posting! I actually enjoyed reading it, you will bbe a great author.I will ensure that I bookmark your blog and will eventually come back from now on. I want to encourage continue your great job

After study a few of the blog posts on your website now, and I truly like your way of blogging. I bookmarked it to my bookmark website list and will be checking back soon. Pls check out my web site as well and let me know what you think.

I was very pleased to find this web-site. I wanted to thanks for your time for this wonderful read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you blog post.

I was very pleased to find this web-site. I wanted to thanks for your time for this wonderful read!! I definitely enjoying every little bit of it and I have you bookmarked to check out new stuff you blog post.

No Medical card is required. Moon rock buds for sales online in USA As a result, come to Archie's online shop and experience modern age of truly legalized marijuana and we offer a variety of strains to satisfy the most discerning of consumers.

I discovered your blog site on google and check a few of your early posts. Continue to keep up the very good operate. I just additional up your RSS feed to my MSN News Reader. Seeking forward to reading more from you later on!…

Austin staffing agencies Scion Staffing Austin is an award-winning temporary staffing agency and executive search firm that connects leading corporations, startups, and nonprofit organizations with impeccable talent throughout the Austin Metro region, all of Texas, and nationally.

Aw, this was a really nice post. In idea I would like to put in writing like this additionally – taking time and actual effort to make a very good article… but what can I say… I procrastinate alot and by no means seem to get something done.

About Me

I’m an economist specializing in macroeconomics, with particular interests in labor and finance. Since finishing my doctorate at Harvard University in 1994, I have been involved in a number of projects related to economics, including writing econometric software, developing quantitative methods to forecast US Treasury yields, and co-authoring The Indebted Society with James Medoff. My occasional writing has appeared in various publications such as Barron’s and Grant’s Interest Rate Observer.

Comment Policy

I intend to delete any comments that I consider offensive or inappropriate, but I may not have a chance to delete them immediately. At present, I do not intend to delete comments just because I think they are lousy comments. I'll let readers decide that for themselves. I reserve the right to start deleting comments more aggressively in the future if the comments section starts to seem like a useless, bloated mess, but we'll cross that bridge when and if we come to it. Statements by commenters are their own opinions, which I do not necessarily condone, nor do I make any representation regarding the veracity of anything contained in such statements.

Revision 9/2/2012: I am going to start aggressively deleting comments that look like spam (retroactively, since this is mainly an issue for older posts). To avoid deletion, please say something that responds to the actual post in a non-trivial way rather than just picking up on keywords or making vague comments about the blog in general.